What are the Differences Between ULIPs and ELSS?

A few decades ago, there were few options available to people when it came to tax saving. Today, however, investors are spoilt for choice with all the new and innovative investment products available in the market.

Two such products are Equity-Linked Savings Schemes (ELSS) and Unit-Linked Insurance Plans (ULIPs). Often, you may confuse among these because both are tax saving investment options. However, before you make an investment decision, knowing the differences is important.

ULIP vs ELSS

ELSS is a diverse equity mutual fund in which investors put money into a fund of their choice and a majority of this money is invested in equities and related securities. ULIP on the other hand is an insurance cum investment product offered by insurance companies where a small portion of the investor’s money goes towards life insurance, while the rest is invested in equity or debt securities.

Following are the six parameters on which the difference between ELSS and ULIPs can be understood clearly:

Insurance

Lock-in

Frequency of investment

Charges and transparency

Investment allocation

Taxation

Insurance

While ULIP offers an insurance cover to the investor, ELSS acts as a pure investment product. ELSS is an investment product with the singular objective of generating returns on investment. With ULIPs, however, the focus is split between insurance and investment. While a hybrid product sounds good in theory, the practical utility of such an investment is yet to convince several investment experts.

Lock-in

Another difference between ELSS and ULIP is that of the lock-in period associated with both products. The lock-in period for ELSS is three years while that of ULIP is five years. Lock-in period is the period during which you are not allowed to withdraw your investment from the scheme. When compared on this front, ELSS clearly offers greater liquidity.

Frequency of investment

Investment in ULIP is made as per a pre-arranged agreement with the insurer. You may opt for a single, annual, semi-annual, or monthly premium. You are required to pay regular premiums for the entire duration of the term, which could be five, seven, ten, or twenty years depending on your preference. You may invest as less as INR 500 in ELSS funds at any time as per your convenience. Furthermore, you have the option to create a Systematic Investment Plan (SIP) if you want to get into the habit of regular investments.

Charges and transparency

Like all other investment products, ELSS and ULIP investments come with certain charges to be paid for the administration and operation of the funds. The only expense associated with ELSS funds is an annual expense ratio that is charged for the administration. The expense ratio works out to be roughly 3% of the investment amount, which is built into the Net Asset Value (NAV) of your scheme and not charged separately. In short, you know exactly how much amount is actually invested, which makes the calculation of returns a lot easier. You are not even required to pay an exit load since the funds remain invested for at least three years.

The list of charges is significantly longer for ULIPs, however. The various costs associated with ULIPs are:

Premium allocation

Mortality charges

Policy administration

Fund management

Switching fund

Surrender charges

While these charges may vary from one insurer to another, they usually add up to a significant percentage of the total investment. Only the balance amount of money is used for investment purposes. Nearly 60% of the total charges are levied in the first few years of investing in the ULIP. The charges begin to taper off after three to four years. By the time the five-year lock-in period ends, the investment usually earns a small return. In order to generate decent returns, investors normally need to stay invested for ten to fifteen years.

Investment Allocation

Yet another difference between ULIP and ELSS is that in case of former, you have the option to invest in debt, equity, or both. This feature is aimed to attract investors with a low-risk appetite. Conversely, a significant portion of the corpus of ELSS funds goes into equities and related securities. ELSS as an investment product has a clear focus on generating high returns—hence the exposure to equity, which has historically outperformed every other type of asset.

Taxation

Both of these are tax-saving investments that offer benefits. However, ELSS follows the EEE (exempt, exempt, exempt) mode where the principal, dividend, and maturity benefits are all tax-free. However, if you surrender ULIPs prior to the lock-in period, all benefits received are reversed and you must pay tax. Maturity benefits on ULIPs are tax-free only in case of your demise.

From all the differences we discussed above, it is clear that ELSS is a far more sophisticated and superior tax-saving investment option than ULIPs. However, you must evaluate different options to make the right choice.